The Economic Advisor

Funding United States Stimulus Package With Chinese Investment in US Treasuries

March 15th 2009

In an effort to fund its stimulus package and support its economy, the United States is pressing China to buy up its treasury securities during these difficult economic times.

With China sitting on a growing mountain of foreign exchange reserves no one can miss the significance of the secretary of state for the United States, Hilary Clinton’s decision to make China the center piece of her four nation Asian tour. Her first tour as America’s top diplomat. While her tour also took her to Japan, South Korea and Indonesia, the focus was clearly on economic relations between the United States and China.

Amid mounting fears that Washington may struggle to finance bank bail outs and ballooning deficits over the next two years, her aim was to convince China to keep investing its foreign exchange reserves in U.S Treasury Securities. This, in order to help finance the bailout of failing U.S banks and pay for its $787 billion stimulus package.

The Treasury has indicated it must raise nearly $500 billion in the first quarter of this year alone.

In her statement on Chinese television, “The Chinese know that in order to start exporting again to its biggest market, the United States, the U.S. has to take some drastic measures with the stimulus package. We have to incur more debt.”

She also said; “we are truly going to rise or fall together. By continuing to support America’s treasury instruments, the Chinese are recognizing our interconnections”.

She offered resounding assurances to Beijing that the Obama administration intends to restore the health of United States public accounts and protect the interest of bond holders once the economy has begun to improve.

China already holds $700 billion worth of U.S. Treasury Securities. Critics fear that they might use this influence if hostility develops between the two countries, especially on such issues as human rights, Tibet and climate change.

China entered the current global economic crisis with ample savings, but also with some significant economic weakness. Their undervalued exchange rate has encouraged over investment in the export sector and as result has made it vulnerable to the slumping world economy.

Although United States Treasury Bonds are considered relatively safe and stable in value compared to other financial instruments, the rise in treasury debt by the Chinese has triggered concerns that the country’s continual pile up of these securities would lead to investment losses if prices tumble in the future. China’s holdings of treasuries, account for over forty five percent of its foreign exchange reserves which could prove risky.

Some critics argue that China needs to diversify its foreign exchange reserves. With the holding of these bonds comes the danger of a price drop as the Unites States issue more of it to stimulate its economy. China should use its abundant foreign exchange reserves to buy commodities and energy related products which would help it support its economic growth.

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